BofA’s Laughlin Squeezed by Mortgage Investors, Regulators

Bank of America Corp.’s Terry Laughlin, head of a new unit managing foreclosures and soured loans, faces increasing pressure from bond buyers and regulators seeking payback for the firm’s role in the housing collapse.

The bank may face “material fines” from government probes into possible irregularities in foreclosure processes, Charlotte, North Carolina-based Bank of America said late Feb. 25 in its annual report. The firm also said that a bondholder group including Pacific Investment Management Co. has almost doubled the number of mortgage deals on which it’s challenging the bank. Legal costs may be as much as $1.5 billion higher than what the bank had set aside, according to the filing.

“He’s certainly not in an enviable position,” said Michael Nix, who helps manage about $950 million at Greenwood, South Carolina-based Greenwood Capital Inc., which sold its Bank of America stake last month. “There are a number of masters to serve here. It will take years to resolve, and any investment pool, pension plan, or insurer with exposure” is considering making claims against the bank.

Laughlin was promoted this month by Chief Executive Officer Brian T. Moynihan to manage the costs of resolving disputes stemming from the bank’s 2008 purchase of Countrywide Financial Corp. After setting aside about $3 billion late last year to settle demands from U.S.-owned mortgage buyers Fannie Mae and Freddie Mac, the bank said other claims could cost an additional $7 billion to $10 billion.

Moynihan’s Pick

Laughlin left his previous post as CEO of Pasadena-based OneWest Bank last year to join Moynihan, a former FleetBoston Financial Inc. colleague. Before being named head of the firm’s Legacy Asset Servicing unit on Feb. 4, he helped negotiate the company’s settlements with Fannie Mae and Freddie Mac.

Assigning the clean-up job to Laughlin, while keeping Barbara Desoer in charge of building the home-lending business, provides “greater focus on resolving legacy mortgage issues,” Moynihan said in a Feb. 4 statement. Moynihan had reassigned sales people to modify mortgages, crimping revenue.

Bond purchasers including the two government-owned firms have demanded that Bank of America buy back loans that the investors say were based on faulty data. The firm faced $10.7 billion in unresolved claims through the end of 2010 as demands from bond insurers and other investors rose.

“I’d be absolutely shocked if more investors didn’t come out of the woodwork” to seek loan repurchases, said Thomas Lawler, a former Fannie Mae economist who is now a Virginia- based housing consultant. “The potential return of someone aggregating the investors and representing them looks like it could be pretty significant.”

Stock Decline

Dan Frahm, a spokesman for the bank, had no immediate comment yesterday. The company said Laughlin was unavailable to be interviewed.

The bank, led by Moynihan since January 2010, posted a $2.2 billion net loss last year driven by housing-related expenses. Bank of America’s shares have declined about 15 percent in the past 12 months of New York trading through Feb. 25.

Lawyers for borrowers said in court papers that firms including Bank of America also mishandled the servicing of loans, using flawed paperwork in hundreds of thousands of foreclosures. U.S. regulators may try to extract $20 billion in penalties from the largest servicers, two people briefed on the potential resolution said last week. Bank of America temporarily halted U.S. foreclosures last year to review its practices, and subsequently resumed the process in most states after implementing “control enhancements,” according to the filing.

Fannie, Freddie Fees

Bank of America said last week that delayed foreclosures may require the company to pay $230 million in “compensatory fees” to Fannie Mae and Freddie Mac. The bank’s agreements with the mortgage buyers provide timelines to resolve late loans, according to the annual filing with the U.S. Securities and Exchange Commission.

The bank also said federal regulators issued a “number of subpoenas” over its creation of mortgage-backed securities.

When banks sell mortgages to investors or bundle them into securities, they typically offer “representations and warranties” in which they guarantee the accuracy of data backing the loans. Examples include borrowers’ income and the appraised worth of the home. If the information is proven wrong, the bank can be forced to buy back the loan or reimburse investors for the lost value.

The company is in talks with a bondholder group that includes Pimco, BlackRock Inc. and the Federal Reserve Bank of New York, people with knowledge of the matter said last year. The group, which in October pressured the firm to repurchase loans, within 115 deals, amounting to about $46 billion, is now questioning 225 securitizations, Bank of America said last week.

‘Number of Questions’

The investor group said in an Oct. 18 letter that the lender failed in its role as a loan servicer to provide required notice of faults in the underlying mortgages. Kathy Patrick, a lawyer for the investors, didn’t immediately return messages.

Bank of America has a “number of questions about the validity of the assertions” in the letter, including whether the investors were qualified to bring claims, the lender said in the filing.

Lawsuits from other investors are piling up. Allstate Corp., the biggest publicly traded U.S. home and auto insurer, in December sued over mortgage-backed securities. Bond insurers including MBIA Inc. and Ambac Financial Group Inc. have said Countrywide fraudulently induced the carriers to guarantee securities filled with defective mortgages.

Bank of America booked $2.6 billion in litigation expenses last year, compared with $1 billion in 2009, the company said last week. The lender estimated losses of $145 million to $1.5 billion beyond the amount already set aside for legal expenses. The figures include instances where the firm had “sufficient appropriate information” to make an estimate, the bank said.

Wells Fargo & Co., the biggest U.S. mortgage lender, said last week that there may be $1.2 billion in litigation losses beyond the reserve already set by the San Francisco-based company.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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